Daily Comment (September 1, 2021)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

We begin today’s Comment with the latest news on Afghanistan, where the Taliban are already fighting opposition militias in what could be the beginning of a civil war.  Next, we review the latest expectations for the nation’s energy supplies following Hurricane Ida.  We then cover a range of mostly U.S. developments that could impact the financial markets in the near term.  We end with the latest news on the coronavirus pandemic, where the recent wave in Asia is clearly having a negative impact on manufacturing.

Afghanistan:  As widely expected, Taliban forces are already fighting opposition militias in areas of the country ruled by their opponents, especially in central and northern Afghanistan.  Taliban officials said they had taken control of the Shotul district in Panjshir, making gains in the sole Afghan province that the militant group hasn’t captured.  Sporadic clashes also continued in the Wardak and Daikundi provinces, which are home to large groups of Hazaras, a primarily Shiite minority, who have formed armed militias.

  • The British government said its special envoy to Afghanistan, Sir Simon Gass, is negotiating with senior Taliban leaders in Qatar to secure a safe exit for stranded Britons and Afghans who worked for the British in Afghanistan over the last two decades.
  • As part of its “Operation Warm Welcome” plans announced yesterday, the Home Office said people arriving in the U.K. under its Afghan relocation and assistance policy would receive indefinite leave to remain, a visa status that has no time limit.
  • We suspect many other NATO countries will ramp up similar relocation and assistance programs for Afghans.  A major political risk for those governments is that they could spark a new wave of protests and pushback by those opposed to immigration.

Hurricane Ida-U.S. Energy Industry:  As officials continue to review the damage caused by Hurricane Ida along the Gulf Coast, it appears that electricity supply disruptions will be the biggest impediment to getting the energy infrastructure back up and running.  It could take two to three weeks for some refineries west of New Orleans to recover as power is restored, while others southeast of the city could take about a month because of a higher potential for flooding.

  • Nevertheless, many observers expect the impact on oil and fuel markets will likely remain muted.
  • Gasoline inventories are ample ahead of Labor Day weekend, the start of a seasonal drop in fuel demand.

U.S. Social Security Trust Fund:  In their annual report, the trustees of the Social Security Trust Fund said that the impact of the coronavirus pandemic last year was less than feared and that the fund would be depleted only one year earlier than previously expected, in 2034, unless Congress takes action to shore it up.

  • Because of the post-pandemic jump in inflation, the trustees said the cost-of-living adjustment (COLA) applied to benefits in 2022 will be close to 6%.
  • If the COLA does come in near that level when it is announced in the coming weeks, it will mark the biggest inflation increase in benefits since 2008.

U.S. Housing Market:  As early as today, the Biden administration will unveil a series of steps aimed at addressing the country’s shortage of entry-level homes and rental properties.  The moves, which are administrative in nature and would not require Congressional action, should increase the supply of entry-level homes and rental properties by boosting their financing and easing construction over the coming years.

  • Based on drafts of the plan, it would:
    • Allow Fannie Mae and Freddie Mac to invest more of their resources into rental housing by boosting an existing regulatory cap on their investments in apartment projects supported by the Low-Income Housing Tax Credit.
    • Expand an existing competitive grant program for Community Development Financial Institutions to encourage affordable housing production.
    • Increase the financing available for manufactured homes, which are built in factories rather than on a lot. They typically cost much less than homes built on sites and are often occupied by lower-income residents.
    • Give first-time home buyers and philanthropies a chance to buy distressed properties insured by the Federal Housing Administration, aiming to give them a leg up against investors that have snapped up many such properties in recent years.
  • Put together, these administrative changes could probably help promote more construction of starter homes and apartments, but we suspect that making a major dent in the housing shortage would require significantly easing zoning and land use regulations at the local level, especially in major metropolitan areas.  To remove homeowners’ incentive to fight new supply, it might also be necessary to dramatically change the U.S. mortgage finance system and its prevalence of easily refinanced, fixed-rate mortgage loans.

U.S. Cryptocurrency Regulation:  SEC Chairman Gensler warned that cryptocurrency trading platforms are putting their own survival at risk unless they heed his call to work within the nation’s regulatory framework.  Asserting that he remained “technology-neutral,” Gensler argued that crypto assets are no different from any others when it comes to the need for investor protection, guarding against illicit activity, and maintaining financial stability.

Global Supply Chains:  One of Asia’s biggest shipping companies is facing the threat of a strike that could further disrupt global supply chains already battling surging costs and shortages of containers and computer chips.  South Korea-based HMM will hold talks today with the company’s labor union about raising wages after sailors and dockworkers voted in favor of a strike last month, demanding sharp pay rises as the group’s profits soared.

COVID-19:  Official data show confirmed cases have risen to 217,848,001 worldwide, with 4,522,230 deaths.  In the United States, confirmed cases rose to 39,200,751, with 640,121 deaths.  Vaccine doses delivered in the U.S. now total 441,332,155, while the number of people who have received at least their first shot totals 205,026,070.  Finally, here is the interactive chart from the Financial Times that allows you to compare cases and deaths among countries, scaled by population.


  • According to the latest CDC data, 61.8% of the U.S. population has now received at least one dose of a vaccine, and 52.4% of the population is fully vaccinated.
  • The EU said it hit its target of fully vaccinating 70% of adult residents by the end of summer, showing how the bloc’s vaccination campaign gathered momentum after a slow start earlier in the year.  However, there are big differences in inoculation rates between different countries, leaving parts of Europe at risk of fresh outbreaks.
  • Despite the EU’s recommendation yesterday to stop nonessential visits from U.S. residents, Spain and Greece said they would remain open to American visitors at least for the coming weeks. Other countries, including France and Italy, said they have no immediate plans to tighten their rules for travel from the U.S.
    • Europe’s leading tourism nations, in most cases, allow U.S. tourists to enter without quarantine if they can show proof of vaccination against COVID-19, recovery from the virus, or a negative test result taken shortly before departure.
    • The decision to keep welcoming U.S. visitors reflects these countries’ dependence on tourism receipts.  It also illustrates the growing reluctance around the world to locking down economic activity again.  In that sense, the pushback is probably a good sign for economic growth and financial markets.

 Economic and Financial Market Impacts

  • Rebounding infections, back-to-school shopping, and government stimulus payments are prompting consumers to stockpile toilet paper again, producing a new round of shortages in some areas.
    • According to market-research firm IRA, paper products (a category that includes paper towels and toilet paper) were 86% in stock as of August 29.
    • That’s a lower in-stock rate than consumer products on average, but nowhere near the height of last year’s toilet paper shortage when paper products were just 40% in stock.
  • In China, more evidence emerged that the latest infection outbreaks and the government’s strong efforts to contain them are already weighing on economic activity.  The August Caixin manufacturing PMI plunged to 49.2, versus the government’s official manufacturing PMI of 50.1, released yesterday.  Like most major PMIs, these are designed so that readings below 50 indicate contracting activity.  Both gauges are now at their lowest levels since early 2020, which will likely prompt the government to launch fiscal, monetary, and/or regulatory stimulus measures in the coming months.
  • Other PMIs in Asia also suggested the latest wave of the pandemic is weighing on factory activity, with some PMIs dropping even further than China’s.

Foreign Policy Responses

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